In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. The Statement, as amended, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Corporation does not own any freestanding or imbedded derivatives.
The Corporation adopted SFAS 133 effective January 1, 2001. The implementation of this statement did not have a material impact on the Corporation’s financial position or results of operations.
General
Total assets of the Corporation at June 30, 2001 of $370,666,000 have increased $48,003,000 or 15% as compared to June 30, 2000. Total loans of $270,153,000 have increased $38,690,000 or 17%, and total deposits of $324,877,000 have increased $36,131,000 or 13%. Since year-end 2000 the Corporation’s assets have increased 6%, loans increased 7%, and deposits increased 5%.
The Corporation’s loan-to-deposit ratio as of June 30, 2001 was 83%, as compared to 80% in 2000.
Net Income
Net income for the first six months in 2001 of $2,597,000 was $454,000 less than the first six months in 2000. This represented a return on average assets during this period of 1.45% and a return on average equity of 14.67%. The return on average assets during the first six months of 2000 was 1.94%, and the return on average equity was 20.21%.
Net income for the three months ending June 30, 2001 of $1,114,000 was $607,000 less than the comparable period in 2000. The return on average assets during the second quarter was 1.23%, and the return on average equity was 12.48%. The return on average assets during the second quarter of 2000 was 2.16%, and the return on average equity was 22.65%.
Earning assets averaged $337,682,000 during the six months ended June 30, 2001, as compared to $293,002,000 for the comparable period in 2000. Earning assets averaged $341,441,000 during the second quarter of 2001 as compared to $297,745,000 during the second quarter of 2000.
Diluted earnings per average common share were $.75 for the first six months of 2001 as compared to $0.86 for the first six months of 2000. For the second quarter of 2001, diluted earnings per average common share were $0.32 as compared to $0.49 for the second quarter of 2000.
Net Interest Income
Interest income represents the interest earned by the Corporation on its portfolio of loans, investment securities, and other short-term investments. Interest expense represents interest paid to the Corporation’s depositors, as well as to others from whom the Corporation borrows funds on a temporary basis.
Net interest income is the difference between interest income on earning assets and interest expense on deposits and other borrowed funds. The volume of loans and deposits and interest rate fluctuations caused by economic conditions greatly affect net interest income.
Net interest income during the first six months of 2001 was $11,153,000 or $279,000 greater than the comparable period in 2000, however, this was on a net earning-asset base (earning assets less interest-bearing deposits and borrowings) that averaged $9,149,000 more than during the first six months of 2000. The prime lending rate decreased from 9.50% at the beginning of 2001 to 6.75% as of June 30, 2001, or a drop of 2.75%. The average prime rate for the first six months of 2001 was 7.98% as compared to an average of 8.97% in 2000.
Due to the Corporation’s asset-sensitive position, decreasing interest rates result in a decrease in the Corporation’s net interest margin. The Corporation’s net interest margin averaged 6.71% during the first six months of 2001 as compared to 7.53% in 2000. The decrease in net interest margin alone is estimated to have resulted in a decrease in interest income of $1,289,000 during the first six months of 2001. This was offset by the increased interest income related to growth of earning assets, which contributed an increase over the comparable period of an estimated $1,568,000.
During the second quarter 2001 the Corporation’s net interest margin averaged 6.53% as compared to 7.80% in 2000. The decrease in net interest margin alone is estimated to have resulted in a decrease in interest income of $937,000 during the second quarter of 2001. This was offset by the increased interest income related to growth of earning assets, which contributed an increase over the comparable period of an estimated $717,000. The result was a net decrease in interest income of $220,000 during the second quarter of 2001 as compared to 2000.
Provision for Credit Losses
An allowance for credit losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated and is in accordance with SFAS 114. The allowance is increased by provisions charged to expense and reduced by net charge-offs. Management continually evaluates the economic climate, the performance of borrowers, and other conditions to determine the adequacy of the allowance.
The ratio of the allowance for credit losses to total loans as of June 30, 2001 was 1.89%, as compared to 2.11% for the period ending June 30, 2000. The Corporation’s ratios for both periods is considered adequate to provide for losses inherent in the loan portfolio.
The Corporation performs a quarterly analysis of the adequacy of its allowance for loan losses. As of June 30, 2001 it had $4,818,000 in allocated allowance and $279,000 in unallocated allowance. The Corporation’s management believes that the amount of unallocated allowance is reasonable due to the growth of the Bank’s loan portfolio and the new credit products that have been introduced. In the past few years, the Bank has opened an Asset-based Lending Department, a Leasing Department and a Small Business Administration lending program. The Bank also has a high concentration of credit in Construction Real Estate lending. The uncertainties associated with the new products, coupled with the Bank’s traditionally strong construction concentration, fully support a strong allowance position.
The Corporation had net charge-offs of $695,000 during the first six months of 2001 as compared to net charge-offs of $48,000 during the comparable period in 2000. During the second quarter of 2001 a charge was taken against the allowance of approximately $600,000 related to one borrower in the Corporation’s Accounts Receivable Department.
The following table provides information on past-due and nonaccrual loans:
June 30,
2001 2000
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Loans Past-due 90 Days or More $ 30,000 $ 21,000
Nonaccrual Loans 1,311,000 24,000
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Total $1,341,000 $ 45,000
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As of June 30, 2001 and 2000, no loans were outstanding that had been restructured. No interest earned on nonaccrual loans that was recorded in income during 2001 remains uncollected. Interest foregone on nonaccrual loans was approximately $252,000 and $6,000, as of June 30, 2001 and 2000 respectively.
Noninterest Income
Noninterest income during the first six months of 2001 was $1,654,000 greater than during the comparable period of 2000. The increase in 2001 was primarily related to increased activity in the Corporation’s brokerage subsidiary, BWC Mortgage Services, which had total fee income of $2,628,000 during the first half of 2001 which was $1,369,000 more than that earned during the comparable period in 2000. The increase in income is in part a reflection of the decrease in interest rates during the current year and the corresponding increase in mortgages and refinancing activity.
The other categories of noninterest income are comparable to the prior year and the Corporation’s growth.
There were gains on securities available-for-sale of $65,000 during the first six months of 2001 whereas there were none during the 2000 period. The gains in 2001 were the result of a large number of agency securities which were called by the issuing agencies due to the decline in rates and the ability of these agencies to reissue debt at lower rates.
During the second quarter of 2001 noninterest income from BWC Mortgage Services was $1,428,000 which was $684,000 more than that earned during the comparable quarter of 2000. The same reasons given above for the six-month results are applicable to the second quarter.
Noninterest Expense
Noninterest expense during the first six months of 2001 was $2,089,000 greater than during the comparable period in 2000.
BWC Mortgage Services reflected an increase in noninterest expense of $943,000 during the respective periods, which is related to their increase in mortgage origination activity due in part to lower interest rates.
Salaries and related benefits were $664,000 greater during the first six months of 2001 as compared to 2000. This increase is related to the growth of operations, general merit increases and provision for performance bonuses. As the year progresses, if performance goals are not met, bonus provisions may be reduced or reversed. The Bank’s staff averaged 119 full-time equivalent (FTE) persons during the first six months of 2001 as compared to 112 FTE in 2000.
Occupancy expense increased $101,000 over the comparable period in 2000 in part due to the Bank’s new San Jose office, which was opened in March, 2001, and due to CPI and operating increases.
Total furniture and equipment expenses increased $58,000 as compared to the 2000 period, which is related in part to the addition of the San Jose office and additions and upgrades to the Bank’s information technology systems.
Other expenses reflect an increase of $323,000 between the respective periods. The Bank incurred an operating loss of approximately $100,000 during the second quarter of 2001 related to check fraud. The balance of the increase in other expenses is primarily related to the Corporation’s growth and expanded activities.
During the second quarter of 2001 the Corporation’s noninterest expense increased $1,332,000 over the comparable quarter of 2000. BWC Mortgage Services reflected a increase in noninterest expense of $497,000 during the comparable periods, and other Corporation noninterest expenses reflected an increase of $835,000. The reasons that were applicable for the first six months apply to the second quarter results, particularly as related to the new San Jose office and the operating loss mentioned above.
Other Real Estate Owned
As of June 30, 2001 the Corporation had no Other Real Estate Owned assets (assets acquired as the result of foreclosure on real estate collateral) on its books.
Capital Adequacy
The Federal Deposit Insurance Corporation (FDIC) has established risk-based capital guidelines requiring banks to maintain certain ratios of “qualifying capital” to “risk-weighted assets”. Under the guidelines, qualifying capital is classified into two tiers, referred to as Tier 1 (core) and Tier 2 (supplementary) capital. Currently, the bank’s Tier 1 capital consists of shareholders’ equity, while Tier 2 capital includes the eligible allowance for credit losses. The Bank has no subordinated notes or debentures included in its capital. Risk-weighted assets are calculated by applying risk percentages specified by the FDIC to categories of both balance-sheet assets and off-balance-sheet assets.
The Bank’s Tier 1 and Total (which included Tier 1 and Tier 2) risk-based capital ratios surpassed the regulatory minimum of 8% at June 30, for both 2001 and 2000. The FDIC has also adopted a leverage ratio requirement. This ratio supplements the risk-based capital ratios and is defined as Tier 1 capital divided by the quarterly average assets during the reporting period. The requirement established a minimum leverage ratio of 3% for the highest-rated banks.
The following table shows the Corporation’s risk-based capital ratios and leverage ratio as of June 30, 2001, December 31, 2000, and June 30, 2000.
Risk-based capital ratios: CAPITAL RATIOS
Minimum
June 30, December 31, June 30, Regulatory
2001 2000 2000 Requirements
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Tier 1 capital ......... 11.48% 12.21% 11.86% 4.00%
Total capital .......... 12.73% 13.58% 13.12% 8.00%
Leverage ratio ......... 9.86% 10.66% 9.87% 3.00%
Liquidity
Liquidity is a key aspect in the overall fiscal health of a financial corporation. The primary source of liquidity for BWC Financial Corp. is its marketable securities and Federal Funds Sold. Cash, investment securities and other temporary investments represented 25% of total assets at June 30, 2001 and 27% at June 30, 2000. The Corporation’s management has an effective asset and liability management program and carefully monitors its liquidity on a continuing basis. Additionally, the Corporation has available from correspondent banks Federal Fund lines of credit totaling $15,000,000 and the ability to borrow, on a collateralized basis, from the Federal Home Loan Bank.
Interest-Rate Risk Management
Movement in interest rates can create fluctuations in the Corporation’s income and economic value due to an imbalance in the re-pricing or maturity of assets or liabilities. The components of interest-rate risk which are actively measured and managed include: re-pricing risk and the risk of non-parallel shifts in the yield curve. Interest-rate risk exposure is actively managed with the goal of minimizing the impact of interest-rate volatility on current earnings and on the market value of equity.
In general, the assets and liabilities generated through ordinary business activities do not naturally create offsetting positions with respect to re-pricing or maturity characteristics. Therefore, the Corporation uses a variety of measurement tools to monitor and control the overall interest-rate risk exposure of the on-balance-sheet positions. For each measurement tool, the level of interest-rate risk created by the assets and liabilities is a function primarily of their contractual interest-rate re-pricing dates and contractual maturity (including principal amortization) dates.
The Corporation’s interest-rate risk as of June 30, 2001 was consistent with the interest-rate exposure presented in the Corporation’s 2000 annual report and was within the Corporation’s risk policy range.
(In thousands)Proper management of the rate sensitivity and maturities of assets and liabilities is required to provide an optimum and stable net interest margin. Interest rate sensitivity spread management is an important tool for achieving this objective and for developing strategies and means to improve profitability. The schedules shown below reflect the interest rate sensitivity position of the Corporation as of June 30, 2001. In a rising interest rate environment, the Corporation’s net interest margin and net interest income will improve. A falling interest rate environment will have the opposite effect. Management believes that the sensitivity ratios reflected in these schedules fall within acceptable ranges, and represent no undue interest rate risk to the future earnings prospects of the Corporation.
Repricing within: 3 3-6 12 1-5 Over 5
In thousands months months months years years Totals
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Assets:
Federal Funds Sold & Short-term
Investments ................. $ 8,434 $ -- $ -- $ -- $ -- $ 8,434
Investment securities .......... 6,893 3,570 11,101 43,998 1,625 67,187
Construction & Real Estate Loans 58,060 44,408 20,893 1,529 6,157 131,047
Commercial Loans ............... 59,696 17,142 3,886 2,486 0 83,210
Consumer Loans ................. 42,218 121 234 542 0 43,115
Leases ......................... 2,486 1,792 3,231 5,273 -- 12,782
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Interest-bearing assets ........ $177,787 $ 67,033 $ 39,345 $ 53,828 $ 7,782 $345,775
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Liabilities:
Money market accounts .......... $ 66,395 $ 66,395 $ -- $ -- $ -- $132,790
Time deposits <$100,000 ........ 10,958 7,469 10,245 1,621 0 30,293
Time deposits >$100,000 ........ 12,400 9,040 10,959 1,462 0 33,861
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Interest-bearing liabilities ... $ 89,753 $ 82,904 $ 21,204 $ 3,083 $ -- $196,944
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Rate-sensitive gap ............. $ 88,034 $(15,871) $ 18,141 $ 50,745 $ 7,782 $148,831
Cumulative rate-sensitive gap .. $ 88,034 $ 72,163 $ 90,304 $141,049 $148,831
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Cumulative rate-sensitive ratio 1.98 1.42 1.47 1.72 1.76
Item 1 - Legal Proceedings
The Corporation is a defendant in legal actions arising from normal
business activities. Management believes that these actions are without merit or
that the ultimate liability, if any, resulting from them will not materially
affect the Corporation's financial position.
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Materially Important Events
None
Item 6 - Exhibits and Reports on Form 8-K
None
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BWC FINANCIAL CORP.
(Registrant)
7/25/2001 James L. Ryan
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Date James L. Ryan
Chairman and Chief Executive Officer
7/25/2001 Leland E. Wines
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Date Leland E. Wines
CFO and Corp. Secretary
